EKN Chapter 3

Question 1

Utility

Answer 1

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service.

Question 2

Cardinal utility

Answer 2

A form of utility measurement where utility is measurable in numerical values.

Question 3

Ordinal utility

Answer 3

A form of utility measurement where consumers’ satisfaction is not quantifiable but the level of satisfaction is based on comparisons in consumptions expressed in indifference curves.

Question 4

Total utility

Answer 4

The total amount of satisfaction derived from the consumption of a single product or a single combination of products.

Question 5

Marginal utility

Answer 5

The extra utility a consumer obtains from the consumption of one additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.

Question 6

Law of diminishing marginal utility

Answer 6

The principle that, as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.

Question 7

Rational behavior

Answer 7

Human behavior based based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.

Question 8

Budget constraint

Answer 8

The limit that the size of the consumer’s income imposes on the ability of that consumer to obtain goods and services.

Question 9

Utility-maximizing rule

Answer 9

The principle that to obtain the greatest utility, the consumer should allocate money income so that the last rand spent on each good or service yields the same marginal utility.

Question 10

Budget line

Answer 10

A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the product’s prices.

Question 11

Indifference curve

Answer 11

A curve showing the combinations of two products that yield the same satisfaction or utility to a consumer.

Question 12

Marginal rate of substitution (MRS)

Answer 12

The rate at which a consumer is willing to substitute one good for another and remain equally satisfied; equal to the slope of the consumers’ indifference curve at each point on the curve.

Question 13

Indifference map

Answer 13

A set of indifference curves, each representing a different level of utility, which together shows the preferences of a consumer.

Question 14

Equilibrium position

Answer 14

In the indifference curve model, the combination of two goods at which a consumer maximizes his or her utility, given a limited amount to spend.